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How Much Money Should You Be Saving Each Month?

Christy Bieber, The Motley Fool

If you don't save enough, you won't hit your financial goals. But how much is enough? This guide will help you decide.

A jar full of coins with save written on the side.

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How much money are you saving each month? If you're like most Americans, the answer is probably “not enough.” Recent surveys found around 65% of Americans are saving 10% of their income or less -- which explains the frightening statistics on retirement savings.

The reality is, you need to save a substantial amount of money to accomplish all your financial goals. Of course, figuring out exactly how much to save is complicated. This guide will help you decide how much cash to set aside to check the must-do money items off your list.

How much money should you save: the short answer

The short answer to the question of how much you should save is: as much as possible. You should be saving for lots of different things including:

  • An emergency fund
  • A holiday fund
  • Vacations
  • A down payment for a home (if you don't already have one) or home repairs (if you do)
  • Retirement
  • College for your kids
  • Healthcare expenses
  • Big purchases

And there's probably more you should put on your list.

To save the maximum amount, make a budget that gives every dollar a job. Allocate money for the essentials, set aside a little for entertainment, and save the rest.

How much money you should save: the medium answer

OK, so simply saying that you should save as much as you can may not help much if you don't feel like you can save anything or you aren't sure how much to allocate to optional expenses.

If you're not sure of the minimum you should be saving, consider what experts recommend.

For a long time, the conventional wisdom was to save 10% of income for retirement. But, 10% isn't enough -- especially if you are off to a late start.

If your income is around the median of $45,552 and you start saving for retirement at age 30, you'd set aside around $4,555 in your retirement account. Assuming you earned a 7% annual return, got an employer match of 50% of contributions up to a maximum of 3% of your salary, and increased contributions after receiving a 2% raise each year, you'd have $990,115 if you retired at 65.

Sounds good, but don't forget you have to factor in inflation -- and adjusted for inflation, your $990,000 account is worth only around $342,000.  That's less than the Employee Benefit Research Institute suggests you save just for healthcare if you retire in 2018.

And, that 10% of your income is only for retirement. You also need to save for all those other things listed above.

To decide how much to save based on a percentage of income, it's best to save a minimum of 20% of what you earn -- including 15% towards retirement savings. This would give you over $1.4 million by the time you turn 65 -- or close to $500,000 adjusted for inflation.  The rest can go towards other goals.

How much should you save: the long answer

Of course, percentage based formulas don't work for everyone because your situation isn't necessarily the same as your neighbor's.

You may plan to retire early, or have five kids whose college you need to pay for. That's why the best way to decide how much to save is to see what you want your money to do and determine how much you'll need to do it.

If you take this approach, list out your goals and the timelines for them. For example:

  • Retire in 30 years with $1.5 million
  • Have $200,000 saved for college in 18 years
  • Have $6,000 saved for emergencies in 2 years
  • Have $20,000 saved for a house in 5 years
  • Have $1,000 saved for a vacation in 6 months

Then, figure out how much you need to save each month to accomplish each of these goals.

For long-term goals you should invest in the stock market, so use online calculators to project how much to save based on a reasonable rate-of-return.

For short-term goals (money you'll need in about two years), you'll just put your money in a savings account. Since savings account interest is relatively low and your time frame is short, divide your goal by the number of months you hope to achieve it. For your $6,000 emergency fund, you'd divide $6,000 / 24 to find you need to save about $250 monthly.

You'll know exactly how much to save for every goal if you take this approach -- and can prioritize hitting those goals in your budget. If you don't have enough to save the desired amount, find ways to increase your income, cut spending elsewhere, or readjust your expectations.

If you take this approach, update your savings plan when you have a new goal to increase the amount you're setting aside each month.

Saving money is essential to financial success

While it may seem like a lot of work to figure out how much to save, you won't be able to grow your wealth if you aren't putting aside money for the future. By using these techniques, you can decide exactly how much to add to your nest egg. Then, the trick is just to find a way to actually save it!

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